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The Employee Retirement Income Security Act (ERISA) requires plan sponsors to manage retirement plans prudently. Prudence, in any given circumstance, is a facts and circumstances determination, and is routinely evaluated according to the so-called “prudent man standard of care:”

[Fiduciaries must act] with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.1

While seemingly straightforward, the concept of prudence, judged according to the “prudent man” standard, often requires further clarification. Plan sponsors, fiduciaries, and courts have had differing interpretations of this language and what it means to act with prudence when managing a retirement plan.

Six Questions You Should Ask Yourself About Prudence

  1. Do you have written plan documents and an investment policy statement, and where are they stored?
  2. Are you hosting an annual plan review, and with whom?
  3. When was the last time you reviewed your governance process and decision-making process?
  4. Do you understand selection and oversight of your investment options?
  5. Do you regularly monitor and evaluate the providers (including service levels and fees) who support your plan?
  6. Are you aware of cybersecurity best practices and coverage requirements for you as a sponsor and your vendors?

Applying Prudence

Some plan sponsors mistakenly assume they are responsible for choosing plans with superior investment performance or at the cheapest overall cost. That prospect is especially concerning, given today’s market volatility, complex compliance tasks, and litigation risks.

Numerous court cases over the years have demonstrated that prudence does not directly equate to cost or performance in this context; rather, ERISA focuses on process (what some refer to as procedural prudence). It calls for a process that results in reasonable fees and returns, rather than the cheapest or highest-yield options, but also means that plan sponsors must make informed decisions that benefit the participants’ best interests overall.

Maintaining sound, coherent, and well-implemented policies and procedures is crucial to the concept of procedural prudence. Doing so includes governing documentation, investment oversight, third-party oversight, and compliance reporting. These four areas of responsibility create a stable platform for plan management. 

Who is a Fiduciary?

A person is a “fiduciary” to a plan to the extent they have any authority or control over the management of plan assets or plan administration. Fiduciaries may include:

  • Plan administrators
  • Administrative and investment committees
  • Trustees
  • Investment managers and investment advisors
  • Claims decision-makers

Prudence and Loyalty

Prudence goes beyond policy considerations as well. It requires operating the plan “for the exclusive purpose of providing benefits to participants and their beneficiaries.”1 In other words, plan sponsors must make decisions that solely benefit the participants rather than additional benefits for the sponsor. There must be no conflicts of interest or self-dealing.

For instance, a plan sponsor could theoretically agree to an arrangement for discounted payroll processing or other service benefits in exchange for placing their plan with a particular provider. ERISA specifically precludes such activity, with few exceptions.

A “Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” released November 22, 2022, adds additional nuance. Plan sponsors can prudently choose between competing investments or options if they are equally suitable for the retirement plan’s interests in the long run. In that scenario, they may opt for a plan with collateral benefits, such as improved plan administration, additional perks and opportunities, or enhanced employee education. However, “the final rule maintains the longstanding principle that the fiduciary may not accept reduced returns or greater risks to secure collateral benefits.”2

Third-Party Support and Oversight

Third parties can play a critical role for plan sponsors. Few companies have the resources to handle every aspect of plan management independently. However, plan sponsors must oversee any advisors and service providers (e.g., record keepers, plan communications, trustees, third-party administrators, or 3(38) advisors). This requirement begins with exercising due diligence in provider selection.

Prudence continues with regular provider reviews to confirm that they offer an appropriate mix of services and options for plan participants at a reasonable cost. On January 24, 2022, the Supreme Court ruled that the requirement that a sponsor conduct regular reviews of fiduciaries also applies to other services such as third-party administration and recordkeeping.3

For example, a lower-cost provider might offer limited online tools or minimal advisory support. This less costly offering may not fully align with the best interests of a company’s employee population. In contrast, a higher-cost provider might deliver a service level that would better meet the specific needs of participants.

Furthermore, third-party oversight can also strengthen prudent management. When sponsors engage external resources to supplement internal capabilities, they benefit from experience with the nuances of prudently operating a plan while also delivering the best possible outcomes for plan participants.

A Quick Look at Liability

Mismanagement opens the possibility of liability for restoring the losses suffered by the plan and paying fines and damages. Historically, it has been an active area of litigation and complaints. A 2021 report by the Government Accountability Office (GAO) found that the Department of Labor (DOL) had received over 10,000 complaints about retirement plan fiduciaries in the past five years. The GAO report also found that the DOL had recovered over $1 billion in losses for retirement plan participants as a result of these complaints., with approximately 200 cases filed in 2020 alone.4 Being uninformed, neglecting to have an investment policy, or failing to review the plan regularly, are all factors that serve to increase exposure.

Third-party providers can help to mitigate such risks by providing helpful input that could serve to strengthen or reinforce a provider’s good judgment within the boundaries set by ERISA. Moreover, additional risks lie outside ERISA, such as responsibility for deploying appropriate and reasonable cybersecurity measures to protect participants using online plan options or services.5

In addition, prudent, careful, and skillful management is a shared responsibility. To mitigate liability risks, fiduciaries should act with care, document decisions, follow a prudent process, and seek professional advice when necessary.

Key service providers include:

3(21) Co-Fiduciary Advisors:

  • 3(21) investment advisors act as a co-fiduciary or investment advisor fiduciary. They provide investment advice and recommendations to the plan sponsor or trustee, acting in the best interests of the plan participants. However, they do not have discretionary authority to make investment decisions.

3(38) Investment Managers:

  • 3(38) investment managers, or "discretionary investment managers," have full discretion in selecting, managing, and monitoring plan investments. They take on sole responsibility for these duties on behalf of the plan sponsor.

3(16) Plan Administrators:

  • 3(16) plan administrators, sometimes called "plan administrator fiduciaries," assume responsibility for the retirement plan's day-to-day administrative tasks and compliance activities. Their services routinely include recordkeeping, participant communications, compliance testing, reporting, and ensuring that the plan meets ERISA requirements.


A comprehensive approach to procedural prudence, incorporating ongoing evaluation, effective communication, and adherence to regulatory guidelines for prudence, is essential to successful plan management. Documented procedures, maintaining high-level meeting minutes that capture decision-making, and a track record of prudent management can serve to document this approach in a way that should withstand even the most robust scrutiny in the case of potential liability. By adopting these best practices, plan sponsors can confidently navigate the complex landscape of prudent retirement plan management.

An experienced retirement plan advisor can help you navigate ERISA regulatory requirements and create a plan design to improve the participant experience. Our comprehensive approach can help you satisfy fiduciary duties and reduce your administrative burden. Connect with Wilmington Trust today to learn more.

[1] See 29 U.S.C. § 1104(a)(1)(A). (https://www.govinfo.gov/content/pkg/COMPS-896/pdf/COMPS-896.pdf, page 223).

[2] See “Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” November 22, 2022. (https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/final-rule-on-prudence-and-loyalty-in-selecting-plan-investments-and-exercising-shareholder-rights)

[3] “Supreme Court Clarifies ERISA Fiduciary’s Duty of Prudence,” Paul, Weiss LLP, January 27, 2022. https://www.paulweiss.com/practices/litigation/litigation/publications/supreme-court-clarifies-erisa-fiduciary-s-duty-of-prudence?id=42249

[4] “Enforcement Efforts to Protect Participants' Rights in Employer-Sponsored Retirement and Health Benefit Plans,” U.S. GAO, https://www.gao.gov/products/gao-21-376

[5] See “Cybersecurity program Best Practices,” U.S. DOL, https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/best-practices.pdf

While every effort has been made to assure that we are correctly summarizing legal obligations, this work does not constitute legal advice, and should not be construed as us providing legal advice, and is absolutely no substitute for obtaining competent legal advice as to your particular obligations.

Wilmington Trust is not authorized to and does not provide legal, accounting or tax advice. Plan sponsors and recordkeepers should consult with their legal and tax counsel on compliance questions.

This article is intended to provide general information only and is not intended to provide specific investment, legal, tax, or accounting advice for any individual. Before acting on any information included in this article, you should consult with your professional adviser or attorney. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, or the opinions of professionals in other business areas of Wilmington Trust or M&T Bank.  M&T Bank and Wilmington Trust have established information barriers between their various business groups.

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